February 26, 2010 / 1:40 PM / 7 years ago

Canada maintains twin deficits in fourth quarter

4 Min Read

OTTAWA (Reuters) - Canada's current account deficit narrowed in the fourth quarter as it sold more oil and cars to the United States, but the government's budget shortfall did the opposite, swelling at year-end as it headed toward a record high.

The deficit in the current account, the broadest measure of international trade covering goods, services and investments, shrank to C$9.77 billion ($9.22 billion) from C$13.80 billion in the third quarter, Statistics Canada said on Friday.

It was the fifth straight deficit and disappointed market expectations for a more modest C$8.50 billion shortfall as deficits in services trade and investment income grew.

Canada now has twin deficits -- its current account and the federal budget -- after a decade or more of surpluses that had made it the fiscally strongest country in the G7 group of rich, industrialized nations.

The budget deficit grew to C$39.36 billion in the first nine months of the 2009-10 fiscal year, the government reported less than a week before it unveils its next budget. The shortfall compares with a surplus of C$373 million a year earlier.

The current account report dragged down the Canadian dollar to C$1.0606 to the U.S. dollar, or 94.29 U.S. cents, from C$1.0580, or 94.52 U.S. cents, just before the data was released.

But the currency later recovered as markets digested the details, especially that Canada returned to a goods surplus with the United States after two quarters of deficits and that the goods surplus expanded for the first time in six quarters.

Exports rebounded in the quarter, led by crude oil and passenger cars. Imports of goods also gained but to a lesser extent.

"Between energy and autos, two of the categories hardest hit by economic recession, this is where one would expect to find the improvements as economic recovery in North America gains traction," said Stewart Hall, markets strategist at HSBC Canada.

Trade Helps Growth

Weak exports have so far prevented a more robust economic recovery in Canada but the trade outlook is now improving, underpinning expectations of a sharp upturn in fourth-quarter growth in gross domestic product, followed by a slower but steady pace of expansion in 2010.

"The improvement in the current account deficit is indicative of the recent improvements in the Canadian trade performance, which is continuing to benefit from the pickup in U.S. and global demand for Canadian products," said Millan Mulraine, economics strategist at TD Securities.

Statscan will report fourth-quarter GDP figures on Monday and most analysts expect annualized growth to have exceeded the Bank of Canada's 3.3 percent projection.

Tax Cuts, Stimulus to Blame

Still, the current account gap puts pressure on Canada's minority Conservative government as it tries to map out a strategy to pay down its gaping debt. The government will deliver its 2010-11 budget on March 4.

Ottawa said nearly half of the April-December budget deficit was due to tax cuts as well as temporary stimulus measures to offset the impact of the recession, such as benefits to the unemployed and aid to the auto industry.

In the nine-month period, revenues slid 11.2 percent year-over-year, led by lower intake of personal and corporate income taxes. Spending jumped 14.8 percent, reflecting increased jobless benefits.

In December, the monthly budget shortfall totaled C$3.06 billion, compared with a surplus of C$334 million a year earlier.

If that monthly trend continues, the full-year 2009-10 deficit will fall just short of the government's estimate of C$56 billion, or 3.7 percent of GDP, but would still mark an all-time high.

($1=$1.05 Canadian)

Reporting by Louise Egan; editing by Peter Galloway and Rob Wilson

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